Good morning and welcome to JBT Corporation's Q4 and full year 2023 earnings conference call. My name is Audra, and I will be your conference operator today. As a reminder, today's call is being recorded. At this time, all lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press the star key followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. I will now turn the call over to JBT's Vice President of Corporate Development and Investor Relations, Kedric Meredith, to begin today's conference.
Thank you, Audra. Good morning, everyone, and welcome to our year-end 2023 conference call. With me on the call is our Chief Executive Officer, Brian Deck, and Chief Financial Officer, Matt Meister. In today's call, we will use forward-looking statements that are subject to the safe harbor language in yesterday's press release and 8-K filing. JBT's periodic SEC filings also contain information regarding risk factors that may have an impact on our results. These documents are available in the Investor Relations section of our website. Also, our discussion today includes references to certain non-GAAP measures. A reconciliation of these measures to the most comparable GAAP measure can be found in the Investor Relations section of our website. Now I'll turn the call over to Brian.
Thanks, Kedric, and good morning, everyone. A lot has occurred since our last call a few months ago, so let me dive in. As you know, JBT announced its intention to pursue a merger with Marel. We believe this merger would be transformative for our customers and shareholders, bringing together two exceptional providers of food and beverage solutions with synergistic products, great technology, and globally recognized brands. I'll provide more color on that, but first about our financial performance. We are very pleased with JBT's strong results in 2023. On a 5% increase in full year revenue, adjusted EBITDA increased 20%. We also generated strong free cash flow with a conversion well over 100%. Moreover, we introduced financial guidance for 2024, which reflects further revenue growth and continued margin expansion.
With that, I'll turn the call over to Matt, who will walk you through our 2023 performance and our guidance for 2024. Matt.
Thanks, Brian, and good morning. Our full-year and Q4 performance reflected a significant year-over-year improvement in profitability, and outperformed the guidance we provided on our last earnings call. For the full year, revenue increased 5% and gross margins improved 190 basis points year- over- year, driven primarily by the benefits from restructuring savings, enhanced operating efficiency, a favorable mix of recurring revenue, and our supply chain initiatives. Adjusted EBITDA grew 20% year over year to $273 million, and adjusted EBITDA margin increased 210 basis points to 16.4%. From an EPS perspective, we delivered diluted earnings per share from continuing operations of $4.02 compared with $3.23 in 2022, an adjusted EPS of $4.10 versus $3.67. We were also very pleased with our 2023 cash flow performance. For the full year, excluding any impact from AeroTech, free cash flow was $167 million, representing a conversion rate of 129%.
Our year-over-year increase in free cash flow was driven by strong operating results and better inventory management as the supply chain constraints experienced in 2022 improved. As of year-end, our net debt to adjusted EBITDA ratio was 0.6 times, a slight increase from the end of the Q3 due to the tax payment associated with the sale of AeroTech. The Q4 of 2023, strong execution resulted in an adjusted EBITDA margin of 18.2%, a 260 basis point improvement year over year. Adjusted EPS, which excludes the $0.33 discrete tax benefit on the sale of a subsidiary, increased 24%. Regarding our guidance for 2024, we are projecting solid top-line growth of 5%-7%, or 4%-6% organic, which excludes a benefit from FX of 1%.
Our organic revenue guidance includes approximately 1% from price as we work to stay price-cost neutral, and about 1%-2% impact from equipment market growth as we expect North American poultry demand to show some recovery in the back half of the year. Additionally, we expect to see growth from our AGV business as we deliver on strong backlog that has been built from demand for warehouse automation. Finally, we are forecasting continued growth in our recurring aftermarket revenue as we invest in resources to support improved customer equipment uptime as well as benefit from continued ramp in OmniBlue adoption. 2024, we are forecasting adjusted EBITDA of $295 million-$310 million, representing year-over-year growth of 11% at the midpoint. Our margin guidance of 17%-17.5% reflects a year-over-year improvement of approximately 85 basis points at the midpoint.
This increase is the result of continued benefits from our ongoing supply chain initiatives and operating leverage, along with restructuring savings of $7-$9 million. We expect full year net interest income of $4 million and a tax rate of 22%-23%, resulting in adjusted earnings per share guidance of $5.05-$5.45. At the midpoint, our adjusted EPS guidance represents a year-over-year increase of 28%. And finally, we anticipate free cash flow conversion of more than 100%, which includes CapEx of about $50-$60 million. Included in our full year guidance is approximately $15 million in M&A costs for the first half of the year related to the intended merger offer for Marel. As a reminder, these M&A costs are excluded from adjusted EBITDA and adjusted EPS.
On a reported GAAP basis, we have updated our guidance ranges versus our preliminary outlook from January 19th to reflect the revised M&A cost assumptions. We will continue to provide updates on estimated costs from this potential merger as we move throughout the year. The Q1 is traditionally our seasonally slowest in terms of revenue and profitability, a trend that we expect will continue in 2024. Given the timing of the anticipated recovery in North American poultry markets, we expect the 2024 second half revenue to be approximately 53% of the total versus 51% in 2023. We are forecasting margin improvement in each sequential quarter of 2024 as market conditions are expected to improve and supply chain actions flow through to the results. With that, let me turn the call back to Brian.
Thanks, Matt. We're entering 2024 with good order momentum and backlog. Q4 orders were solid $418 million, and full year orders increased 5% year-over-year. In the Q4, similar to the third, we enjoyed strengthening order trends in Europe and Asia, including from the poultry industry. While we have yet to see improved orders from North American poultry customers, the industry's price-cost dynamics are improving. We recently returned from the annual IPPE, otherwise known as the Poultry Show, where attendance was among the best ever. The mood was more upbeat, and the conversations constructive. Overall, our interactions support our belief that we're entering a period of recovery in equipment demand from that market. Switching gears, as we have talked about for the last few years, JBT's greatest opportunity for margin improvement rests in our supply chain initiatives.
Given post-pandemic supply chain pressures during 2021 and 2022, we were hyper-focused on continuity of supply. In 2023, supply chain conditions improved, allowing us to shift our focus and resources to optimizing costs and inventory management. With the sale of AeroTech, we can focus our supply chain efforts on a more homogeneous supply base. We are engaged in our strategic sourcing initiative, consolidating JBT's spend to concentrate purchasing where we can improve the economic delivery and quality of our supply base. We're also engaged in our process of value engineering as we work to standardize components and reduce complexity of product design without compromising our quality or performance promise to our customers. This will lower costs, improve manufacturing efficiency, and facilitate inventory management. We plan to build on the supply chain success we captured in 2023 and generate some 25-50 basis points of incremental margin expansion in 2024.
As you can see from our strong performance in 2023 and our 2024 guidance, JBT's prospects remain bright, reflecting our strong resilient business model, diverse product and end-market mix, and our value-added acquisitions. Beyond what we've already achieved, the proposed merger with Marel represents a unique opportunity to create broad stakeholder value. We have not yet launched the tender offer for Marel, which we now believe will most likely occur in the Q2 . Of course, the proposed merger is subject to respective shareholder approval and regulatory clearance. We will share more about the transaction on the conference call we plan to hold post-launch. In the meantime, here's what we can share. We believe the combination will accelerate growth by capturing cross-sell opportunities across our complementary portfolios and through an expanded global commercial footprint and customer care resources.
The combined company would offer an even fuller line of solutions in protein, pet food, and plant-based protein processing. Scalable R&D would expand our ability to develop innovative solutions to address customer priorities, including the growing demand for automation and sustainable solutions. The enhanced reach of the customer care organization would improve service levels and make it easier to do business with the combined company. Furthermore, by leveraging our complementary and comprehensive digital solutions, JBT's OmniBlue and Marel's Innova, we would optimize equipment uptime and efficiency for customers and further the digital engagement ecosystem. Even before considering revenue synergies, which could be meaningful, we have identified cost synergies of more than $125 million that we expect to capture within three years of completing the transaction. We believe our ongoing supply chain initiatives would improve the collective cost base.
Additionally, we expect benefits from leveraging our collective G&A spend and optimizing manufacturing efficiency. Importantly, we will advance the business in a way that respects and supports Marel's heritage. We anticipate that the combined company will be named JBT Marel. Marel's shareholders are expected to have representation on the combined board of directors proportional to their pro forma ownership. We are committed to building a best-in-class talent organization. The plan is to have a European headquarters in Iceland, and the company shares will have a secondary listing on Nasdaq Iceland. Assuming the transaction closes at year-end 2024, the combined company is expected to have a net leverage ratio of less than 3.5 times, which is prior to any cost synergies. Given the strong cash flow profile and improving EBITDA of the combined business, we would expect leverage to be well below three times by the end of 2025.
With all the activity surrounding the intention to merge with Marel, it remains business as usual for JBT. Our priority, as always, is to provide superior solutions and service to customers. It's JBT's employees around the globe that make that happen every day. With that, let's take your questions. Operator?
Thank you. At this time, I would like to remind everyone, in order to ask a question, press star then the number one on your telephone keypad. We'll take our first question from Lawrence De Maria at William Blair.
Thank you. Good morning, everybody. I just wanted to check in on this tender. So I think you're saying most likely in 2Q. At IPPE, I think the messaging was diligence for four to six more weeks and then the tender. So I guess the question, first of all, is the timeframe slipping a little bit? And I would have think it would have been sooner. And secondly, have you started the regulatory approval process yet?
Right. So as it relates to the timing specifically, as we've uncovered all the regulatory requirements as part of both Iceland and the US on the SEC side, the workstreams associated with that, we just found that we need a little bit more time to get through all of that prior to launch. So nothing particularly problematic with that. It's just a matter of getting through the workstreams. And as part of that, we are on the antitrust side, while we haven't formally filed yet, we do continue that process in terms of the data collection, understanding which jurisdictions we're going to file in. So there's a tremendous amount of work associated with that. F rankly, antitrust is the longer pull in the tent, and that's going to drive the overall timing of the transaction. So we're still focused on completing everything by the end of 2024.
Okay. Thank you. S econdly, as you're going through the process and learning, two questions. First, is it kind of confirming what you think around the overlap is more complementary versus competitive? And secondly, have you started to talk to Marel shareholders, start dialing for approval from them? And if so, what's the feedback been so far? And I'll pass it on. Thank you.
Right. So on the first question, indeed, the portfolio is mostly complementary as we have expected. So we don't see, from an antitrust perspective, a particular issue. However, from a customer perspective, we think it's quite value-creating. I t is confirming some of our suspicions and hypotheses around what the combined company could look like and the value creation and offering that we could provide on a combined basis. In terms of engaging with Marel shareholders, no, we have not started that yet. That would not start until after we launch the tender offer. Obviously, we like to have something formal in front of them in order to speak to. T hat won't occur until the launch itself.
Okay. Thank you. Good luck.
Thank you.
We'll move next to Walter Liptak at Seaport Research .
Hi. Morning, Walt.
Thanks. Good morning. Good morning. Well, one day at first, maybe a fundamental question about just the 2024 outlook. And it sounds like a pretty big part of the EPS growth is coming from margin improvement. And so I wonder if you could just walk us through maybe some of the buckets of where that's going to come from. Is it some of the restructuring's already done? Are there more restructurings that have to happen in supply chain, etc.?
Yeah, Walt. It's Matt. I'd say it's the pure growth in EBITDA dollars, I'd say it's probably 50/50 between the volume benefit that we're getting from the sales growth and then the margin improvements that we expect. And those margin improvements are going to come from the restructuring savings from the actions that we've already taken. T hose actions are, for the most part, already done. There is a little bit that's going to happen here in the Q1 , but it's very small. And those savings for 2024 are expected to be between $7 million-$9 million, and we should be able to hit full run rate by the end of the second half. So that's a big portion of the benefit.
And then the other piece of it is the supply chain benefits that we saw in 2023 benefiting the bottom line, now continuing into 2024 with additional actions being taken by the supply chain team to drive cost out through both value engineering as well as resourcing activities. And certainly, the margins are going to continue to get better as we grow because of just getting leverage on the fixed costs, which will somewhat be offset by some investments we need to make to support the organic growth that we want to follow through on.
Okay. All right. Great. On the volume part of that margin answer, how much of the volume do you think is coming from the aftermarket parts sales? Are we seeing benefits from OmniBlue, or is this orders that are just flowing through from equipment?
Yeah. I would say in terms of mix for 2024, we're still expecting that 50/50-ish type mix. And we are seeing as part of that, we're certainly seeing an improvement and additional contribution from the OmniBlue side. We are starting to see some nice momentum in new customers adopting it, but also converting our old iOPS platform as those contracts lapse. So good momentum there. So we are excited about that. But no major mix changes in 2024. Like I said, we do have a little bit higher on the equipment growth side, particularly because of the AGV that we mentioned, along with some recovery in the back half of the year on the protein side.
Okay. Great. Okay. Thank you.
Thanks.
We'll go next to Mig Dobre at R.W. Baird.
Yes. Good morning. Thanks for sending the questions. Can we put a finer point on Q1, maybe? You talked about the seasonality here, but maybe frame how you sort of see revenue either year over year or sequentially, and what's the starting point for margin for the year as well?
Yeah. I mean, I think revenue in the quarter is going to be certainly better than we saw last year in Q1. We do see growth, not to the same level of growth that we're seeing for the full year, but certainly because of the back half nature of the recovery in North American poultry. But there is some modest growth in the Q1 . And then on a margin perspective, like we said, I mean, year-over-year, there will be improvements in margins. And I'd say the 75-100 basis point improvement that we're seeing for the full year, we would expect to see that in every quarter as an improvement year-over-year.
That's helpful. Thank you. Looking through your slide deck, on slide five, you kind of call out the strong performance that you had in recurring revenue. And if my math is right, the $95 million growth that you've had in recurring revenue, that would be double-digit growth, if I'm not mistaken, in 2023. I guess I'm curious as to what's been driving that growth in recurring. And as you look into 2024, your implied guidance still calls for growth in recurring revenue, but obviously much, much lower than what you've had in 2023. I guess I'm just kind of curious as to what might be changing here, or is it just a function of tougher comps, maybe?
Right. Yeah. There's a couple of things. I would say the primary thing that we saw was, particularly, again, in North America, as there was some deferral of CapEx investment, more spending on refurbishment and projects and keeping things, I'll say, more stable and keeping that output strong without having to make new equipment purchases. So obviously, as they switch a little bit from that to new equipment in 2024, you'll see a little bit of moderation back to the mean. T hat, I would say, is the primary driver.
Were there some sort of, I don't know, pricing benefits or something of the sort that might have been disproportionately benefiting recurring revenue in 2023?
I would say generally, yes. I would say a little bit we obviously captured price increase on both equipment and on aftermarket. I wouldn't say they're materially different. One thing I should mention, however, Mig, is that we bought Bevcorp at the, what, I think, August of 2022. And that is a 60% plus recurring revenue business. y ou do get a full-year benefit of that as well. So some of that would be inorganic in that high growth rate.
That's interesting.
So if you recall, they've got about $90 million or so of revenue and about 60%-65% recurring revenue. You get the full-year benefit of that instead of the four months that we enjoyed in 2022.
Yeah. That makes sense. Thank you for that clarity. In terms of the OE side of the business, I guess if I'm not misunderstanding things here, it looks like OE was down maybe in 2023. And I'm curious, was poultry the only source of pressure that you had in OE, or were there other verticals that decline as well? A s you look at 2024, in poultry specifically, is there a way to sort of frame for us what the swing would be? I mean, I don't know if this business is running at 75% of what you would call mid-cycle or what. W hat sort of recovery do you factor in into 2024? Thank you.
Right. I n 2023, North American poultry was clearly the, I would say, largest contributor to and you're right. The equipment side had some slightly negative growth in 2023. The primary culprit of that was the lower order book coming into the year and throughout the year, frankly, on equipment orders. The other area that reverted to, I would say, more normalized levels was pet food. Pet food in 2022 and 2021, for that matter, was tremendous. It remains a decent market in 2023, but compared to the real robustness that we saw in 2021 and 2022, it reverted. So those were the two main ones. I'm sorry, what was the second part of your question?
Yeah. As you think about 2024, where do you think you've been running in terms of what you would consider to be normalized demand in these end markets that have compressed? I guess you were clear about pet food, but I'm not clear in poultry in terms of where you are versus what's normal demand. W hat do you factor in in 2024 in terms of bounce-back and growth?
Right. I would say in North America, more than 20% down versus, I would say, a normal mid-cycle year on equipment, right, that got somewhat bolstered by the aftermarket. But on the equipment side, north of 20% lower than what we normally would be. We don't see that full recovery this year, right, because we don't think we're going to. We expect to start receiving orders here in the front half and converting that to revenue in the back half. So I would say kind of in that mid, I'll say, halfway recovery, if you will, in the back half of the year. And if things go as expected, kind of more of a full recovery in 2025.
Great. Thanks for the call. I appreciate it.
Sure.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. We'll pause just a moment. There are no further questions at this time. I would like to turn the conference over to Mr. Brian Deck for closing remarks.
Thank you all for joining us this morning. As always, Kedric and Marlee will be available if you have any follow-up questions.
This concludes today's conference call. Thank you for your participation. You may now disconnect.